Cutting back income tax rates, a simple way to address affordability and labour supply: BMO's Kavcic
As the federal government gets ready to release its 2023 budget on Tuesday, one economist said fiscal stimulus is unlikely to be a focal point.
In a note to clients on Friday, Robert Kavcic, a senior economist at BMO Capital Markets, said “wholesale fiscal stimulus” is not suitable for the current economic environment. He added that this is something Finance Minister Chrystia Freeland has previously acknowledged.
“The biggest question for me is going to be how much fiscal stimulus we actually see rollout in this budget, I'm presuming not a lot, and then the impact that obviously has on the economy and the inflation outlook going forward,” Kavcic said in a television interview with BNN Bloomberg Monday.
Last year in the federal government’s Fall Economic Statement, it estimated it would run a $36.4 billion deficit in fiscal year 2022-23, Kavcic said in the note.
“Those balances reflect a dramatic positive turn from the deep pandemic deficit that weighed in at almost 15 per cent of GDP [gross domestic product],” Kavcic said in the note.
One benefit of the current inflationary environment is a “massive run-up” in government revenue, according to Kavcic, at both provincial and federal levels.
“If you look at where revenues are right now versus pre-COVID-19, and the pre-COVID-19 baseline, we're probably running at about $90 or $100 billion above that level, which is a massive positive fiscal surprise for Ottawa,” he said.
Despite higher-than-expected government revenues, Kavcic said the current spending on government programs is around $90 billion above pre-pandemic levels, even as many of the temporary pandemic-era government support measures have “rolled off.”
Kavcic said two of the biggest issues the Canadian economy is facing are labour supply and affordability.
“Income tax rates across the spectrum are a very simple way to address both affordability and the longer-term supply of labour,” Kavcic said.
“What's really interesting is that when you look down at the provincial level.... two provinces have already started to actually cut back on personal income tax rates with those two factors exactly in mind.”